The SEC's 'unconstitutional' collection of trading data

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Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:

A deeper look into “one of the greatest government-mandated mass collections of personal financial data in United States history.”
How Friday’s ETF inflows show bitcoin’s link to interest rate expectations.
The company earnings call, and data report, to listen/watch for this week.

Crypto enters the TradFi fight

The SEC’s newly operational Consolidated Audit Trail (CAT) database is disproportionately impacting blockchain users, according to crypto lobbyist groups.

The CAT is a result of SEC Rule 613, adopted in the wake of the financial crisis in an attempt to give regulators more visibility into securities markets. Today, the database is one of the largest ever created. It collects virtually all trading data in the US, requiring securities exchanges, FINRA members, broker-dealers and others to report transactions.

A conservative think tank — the National Center for Public Policy Research — was among those to sue the SEC last April over the CAT, calling the database unconstitutional.

The database is an “unprecedented scheme…to unilaterally set in motion one of the greatest government mandated mass collections of personal financial data in United States history,” the class action complaint states.

The Blockchain Association (BA) and its sister organization, the DeFi Education Fund (DEF), agree. The crypto lobbyist groups filed an amicus brief last week in support of class action defendants, furthering that Rule 613 has even more detrimental effects on the crypto industry.

Rule 613 does not mention crypto or digital assets at all, a fact the BA and DEF do not dispute. Even so, they argue: Because the SEC has made it clear they see certain crypto actors as “exchanges, brokers and/or dealers,” reporting requirements are likely to apply to crypto firms as well.

The database will transform “blockchains into a massive and fully de-anonymized repository for the government to search at will, without any need to show cause to obtain a warrant,” the amicus brief reads.

“As for digital asset market participants, this information could end up including transaction identifiers and wallet addresses, giving those with access to the database insight into users’ forward- and backward-looking transaction information for all time,” BA legal head Marisa Coppel and DEF CLO Amanda Tuminelli wrote in a June op-ed.

Conservatives — and now the broader crypto community — are not the only ones seeking to block Rule 613, as Citadel Securities and the American Securities Association are also leading a legal charge against the SEC.

The pair of entities first sued the securities regulator last fall and now have the support of pretty much every US bank, brokerage, hedge fund and asset manager — plus the Financial Markets Association, the Managed Funds Association, the Alternative Investment Management Association and other trade groups. Citadel rival Virtu Financial Inc. even signed on.

The SEC maintains that the CAT system is well within its authority to regulate markets. Citadel’s suit is “meritless,” the agency said, and characterizing it as a tool “to snoop on Americans’ personal financial decisions” is baseless.

The SEC may have recently had a couple of losses in court when it comes to crypto cases. But its track record for TradFi disputes, especially those relating to its authority to oversee markets, is pretty stellar.

Still, we know major financial players are willing to put a lot of money into blocking the CAT. So it’s a case worth watching to see whether or not the BA and DEF’s fears of the impact on crypto actually play out.

— Casey Wagner

$40 million

The value of short liquidations seen on Friday for BTC perpetual futures, according to a Monday Bitfinex report.

“As interest in delta-neutral and funding arbitrage trades rises, the directional open interest in the market has decreased, potentially allowing more room for price appreciation in bitcoin and altcoins,” the Bitfinex analysts wrote.

The liquidations came on a day during which bitcoin saw a roughly 6% move, marking the second-highest daily move since May 20. This price change — removing short open interest from the market — is “a sign of risk appetite returning to markets,” they added.

The ETF flows-rate expectations link

Investors poured half a billion dollars into US spot bitcoin ETFs last week, with roughly half of those flows entering the offerings on Friday.

The catalyst appears obvious — “indicating bitcoin’s sensitivity to interest rate expectations,” according to CoinShares research head James Butterfill.

Friday was of course the day Jerome Powell gave an anticipated speech in Jackson Hole. One of his headline declarations during the address: “The time has come for policy to adjust.”

Indeed, $252 million of the week’s $506 million bitcoin ETF net inflows came that day, following what Butterfill called “dovish comments.” That flow figure was the highest in a single day since July 22.

Contrarily, on July 31 — the day the Fed held rates steady, hinting only slightly at a future cut — bitcoin ETF flows were essentially flat.

The latest probability of the Fed cutting interest rates by 25 basis points in September? That would be 67.5%, CME Group’s FedWatch tool indicates. The other 32.5% expect a cut amounting to 50 bps.

US spot ether ETFs did not see a similar inflow bump, as $45 million trickled out of those funds last week, including outflows of nearly $6 million on Friday.

Dragged down by the $2.5 billion in outflows for the higher-priced Grayscale Ethereum Trust (ETHE), the fund category’s collective flows remain $465 million in the red a month after launching.

That said, ETH ETF flows going forward are likely to be governed in part by US monetary policy expectations, Butterfill told Blockworks.

“While Ethereum shouldn’t fundamentally be impacted by this,” he added, “it is highly correlated to bitcoin, [whose] prices are closely influenced by Fed actions.”

So we know what to watch for, though we were monitoring that already.

— Ben Strack

On Our Radar

Welcome back to another week of On the Margin newsletters. As we continue to digest last week’s mixed economic data and comments from the annual Jackson Hole summit, markets will be eyeing some important earnings reports this week and the last major inflation print ahead of the next FOMC meeting. Here’s what we are watching:

NVIDIA is scheduled to report its second quarter earnings on Wednesday after markets close. Analysts insist the report will move markets, calling it the “marquee event” of the week. Even a slight miss (expectations have revenue more than doubling) could send NVDA shares, and the broader market, tumbling. The chip maker’s stock price on Monday was down 2.6% at 2 pm ET.
The Fed’s preferred inflation measure, the PCE index, will come out on Friday. It’s the last PCE reading before the Fed’s next policy-setting meeting in September. Analysts expect Core PCE (which excludes volatile food and energy) to increase 0.2% in July from June. A reading of less than 2.6% year-over-year would show a decrease in annual inflation and increase odds of a 50 bps rate cut next month.

— Casey Wagner

Bulletin Board

Bitcoin was trading at roughly $63,400 at 2 pm ET — down 1.3% in the past 24 hours but up 8.5% from a week ago. ETH had dropped nearly 2% over the past day by that time, with gains amounting to 3% over the last seven days.
As Blockworks editor Katherine Ross noted in today’s Empire newsletter, Judge William Orrick denied Kraken’s attempt to dismiss the SEC’s suit against the crypto exchange.
Stablecoin market capitalization has just about reached $170 billion — roughly matching the all-time high hit in March 2022, DeFiLlama data shows. Tether’s market cap makes up about 70% of that total.

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